EconoFACTS

September 17, 2024 | 09:18

Canadian CPI (August) — Back to Target

Economist

Managing Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal nearly two decades. He is re-sponsible for the Canadian macro-econom... (Read more)

Benjamin Reitzes

Managing Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal nearly two decades. He is re-sponsible for the Canadian macro-econom... (Read more)

Canadian consumer prices fell 0.2% in August (though they were up 0.1% on a seasonally adjusted basis), with nearly across-the-board weakness, the polar opposite of what we saw in August 2023. The decline, combined with favourable base effects, pulled inflation down to 2% for the first time in over three years. There was particular softness in clothing and household operations (cell phone services prices fell sharply; note that there's a new methodology for that category). Airfares were down sharply as well. The discretionary nature of clothing and airfares highlights the underlying weakness in the economy.

Food prices dipped a touch in the month, but a deeper decline in groceries a year ago pushed the yearly pace a few ticks higher to 2.4% y/y. Gasoline fell 2.6%, as expected, contributing to the overall drop in prices. Note that gasoline prices are poised to slide even further in September (more than 6%), which could pull the headline inflation rate below 2% for the first time since early 2021.

Housing continues to be stubbornly strong. Rent surged 1% in the month, the largest increase this year, lifting the prices 8.9% above year-ago levels, matching May's 41-year high. Mortgage interest costs decelerated further to +18.8% y/y, but still-solid monthly increases suggest that category will remain elevated for some time.

The Bank of Canada's two favoured core CPI metrics continued to make progress on moving toward the 2% target. The Trim and Median were up 0.2% each, which cut the annual advance three ticks to 2.4% and one tick to 2.3%, respectively. The short-term three-month and six-month annualized rates are all in the 2% to 2.5% range, pointing to further progress toward 2%.

Key Takeaway: The weaker headline reading, with inflation finally back to the 2% target for the first time in over three years, will reinforce expectations for the Bank of Canada to cut rates further. The question markets are grappling with is whether the next move will be 25 bps or 50 bps. The BoC has highlighted that downside growth risks are a key concern, suggesting that next week's GDP figures loom large in the 25 vs 50 debate. Today's figure tilts the scales a touch toward a more aggressive path, but there's still another CPI report before the next meeting. If we get another big downside surprise, calls for a 50 bp cut will only grow louder.

Table 1 - Canada — CPI

(month/month % change)

Source: BMO Economics, Haver Analytics